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Chapter 11-Part A Income Taxation of Individuals. Deductions For AGI Itemized Deductions Fall, 2007. In 2007, Mr. and Ms. Jones have combined salaries of $60,000.
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Their only expenditures affecting the tax return are state income taxes of $6,000, mortgage interest of $5,000 and real estate taxes amounting to $1,000.
They have two small children whom they support, and file a joint return.
What is their taxable income for 2007?
HW-19 Student Loan InterestCecilia is married and files a joint return with her husband, Steve. They have modified AGI of $120,000. Cecilia paid $2,700 in student loan interest this year. What is her interest deduction?
HW-20 Health Savings AccountsAshley is single and owns a sole proprietorship. She pays $2,600 for high-deductible medical policy for herself --with a $2,300 deductible. How much can she set aside in an HSA?
HWA-20 Health Savings AccountsThe maximum Ashley can contribute to an HSA for 2007 is $2,850 ($3,650 if 55 or over).She can deduct the $2,850 for AGI if contributed to an HSA. She can deduct the $2,600 medical insurance premium only if she itemizes.
Must meet four tests
If not a qualifying child, then three similar tests must be met:
HW-20 Dependency Exemptions-1Joseph provides $12,000 of support for his mother, Miriam, who lives in his house. Miriam is a U.S. citizen and single. Miriam’s only income is Social Security of $5,000 and taxable pension income of $4,000. Miriam uses the Social Security income for support but puts all of the pension income into her savings account.
HW-21 Dependency Exemptions-2Joseph also provides $6,000 of support for his 22-year-old son, Mike, who is a full-time student attending college on a basketball scholarship. The balance of Mike’s support comes from a scholarship that pays Mike's $10,000 tuition and fees for the year. How many dependents can Joseph claim on his tax return?
HWA-21 Dependency ExemptionsOne. Miriam’s taxable income ($4,000) is above the allowable $3,400 limit so she does not pass the gross income test. Mike is a qualifying child so he qualifies as a dependent.
HW-26 Phaseout of ExemptionsWhat is the total deduction for personal and dependency exemptions for the following taxpayers in 2007?a. Married filing jointly with two dependents and AGI of $300,000b. Single with no dependents and AGI of $200,000
HWA-26 Phaseout of Exemptions-1a. $8,704. Their exemptions before phaseout are $13,600 ($3,400 x 4).($300,000 - $234,600)/$2,500 = 26.16 (round up to 27)27 x 2 = 54% phaseout percentage 54% x $13,600 x 2/3 phaseout reduction = $4,896.$13,600 - $4,896 = $8,704
HWA-26 Phaseout of Exemptions-2b. $2,584. His exemption before phaseout is $3,400 for one personal exemption.($200,000 - $156,400)/$2,500 = 17.44 (round up to 18) 18 x 2 = 36% phaseout percentage36% x $3,400 x 2/3 phaseout reduction = $816 $3,400 - $816 = $2,584.
HW-24 Dependent’s Taxable IncomeScott is 15 years old and qualifies as a dependent on his parents' tax return. In 2007 he earns $2,500 from a part-time job and also receives $800 of dividend income on stock given to him by his aunt. What is Scott’s taxable income?
Premiums for disability insurance and for loss of life, limb or income are not deductible
Premiums for long-term care insurance are deductible, subject to limits based on age
HW-27 Medical Expense DeductionDaniel's AGI is $90,000. He incurred $14,000 of medical expenses and was reimbursed for $3,000 of these expenses. What is his allowable medical expense deduction if he itemizes?
HW-28 Tax Benefit RuleIn 2006, Rebecca and Gregory, a married couple, filed a joint return with AGI of $70,000 and total allowable itemized deductions of $10,150, which included state income taxes paid of $3,100. They received a $900 refund of state income taxes in April 2007.How much of the state income tax refund must they include in income and in which year do they include it?
HWA-28 Tax Benefit RuleZero. Their itemized deductions of $10,150 did not exceed their standard deduction of $10,300. As there was no tax benefit derived from deducting state income taxes, none of the refund is included in income.
HWA-28 Tax Benefit RuleIf total itemized deductions had exceeded the standard deduction, then only that portion of the refund that exceeded the std deduction (up to the value of the refund) would be included in income. For example, if their total itemized deductions for 2006 had been $11,000, then $700 ($11,000 - $10,300 standard deduction) of the $900 refund would be included in income in 2007. If their itemized deductions had been $11,200 or more, then the entire $900 refund would be included in income in 2007.
HW-30 Interest Expense-1Pablo and Adriana, a married couple who file a joint return, purchase a $190,000 home by paying $38,000 cash down and taking a mortgage for the balance of the purchase price. The mortgage company charges them $3,000 in points for originating the loan that they pay at closing. They pay $7,000 in interest on the mortgage this year. They also purchase a new car this year for $28,000 by taking out a car loan from their credit union. They paid $975 in interest on the car loan this year. How much can Pablo and Adriana deduct for interest expense this year if they itemize their deductions?
HW-29 Investment Interest Expense-1Edward (single) with a 28 % marginal tax rate, incurs interest expense of $10,000 attributable to his investment in stocks and bonds. His gross investment income is $6,200 ($1,000 of which is from long-term capital gains and dividend income), and his adjusted gross income, including his investment income, is $68,000.
HW-20 Invest. Interest Exp.-2Edward incurs a $100 brokerage account maintenance fee and a $300 certified financial planner’s counseling fee. He also has $1,200 of other qualifying misc. itemized deductions.
HW-29 Investment Interest Expensea. How much can Edward deduct for miscellaneous itemized deductions?b. What are Edward’s options in determining his deduction for investment interest expense? Explain.c. What happens to the investment interest expense that he cannot deduct in the current year?
HWA-29 Invest. Interest Expensea. $240 [$100 + $300 + $1,200 – ($68,000 x 2%)] b. He can deduct $5,960 if he elects to forgo the 15% rate for his capital gain and dividend income; otherwise, he can only deduct $4,960.
HWA-29 Invest. Interest ExpenseEdward’s deduction for invest. interest expense is limited to his net invest. income, which is the excess of gross invest. income over deductible invest. expenses (excluding interest). His deductible investment expense is the lesser of the actual $400 investment expense or the allowable $250 miscellaneous expense deduction (as computed above).
HWA-29 Invest. Interest ExpenseEdward’s investment income can include long-term capital gains and dividend income only if he elects to forgo the special 15 percent tax rate that applies to that type of income. If he makes this election, his taxable income will increase by $1,000 but his tax will only increase by $130 [$1,000 x (28% - 15%)]; he will, however, be able to deduct $1,000 more in investment interest, which will save $280 ($1,000 x 28%) in taxes.
HWA-29 Invest. Interest ExpenseHis net tax savings is $150 ($280 - $130), so he should make the election. He will report investment income of $5,960 ($6,200 - $240) and investment interest expense of $5,960. If he does not make the election, he can only deduct $4,960 ($5,200 - $240) of investment interest expense.
HWA-29 Invest. Interest Expensec. The remaining $4,040 ($10,000 - $5,960) is carried forward (indefinitely) until he has sufficient net investment income in a future year.
HW-31 Charitable Contributions-1Arnold, a single individual, has adjusted gross income of $65,000 in the current year. Arnold donates the following items to his favorite qualified charities:$5,000 cash to the athletic department booster club at State University. This contribution gives him the right to purchase preferred seats to all home games. The value of this preferred right is $900.
HW-31 Charitable Contributions-2ABC stock acquired six years ago at a cost of $6,000. Its FMV at the date of contribution was $22,000.Personal clothing items purchased two years ago at a cost of $1,000. Their FMV at the date of contribution was $400.Charitable contribution in the current year?